Movie Gallery Q2 loss threatens future

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Movie Gallery has delayed the introduction of a DVD-by-mail subscription service that will compete with Netflix and Blockbuster Total Access until next year -- assuming the company can stay in business that long.

Movie Gallery said Friday that its second-quarter loss swelled to $310 million compared with a $14.9 million loss last year, and its debt has risen to $768.4 million while the company has just $45.5 million in cash and equivalents. Revenue slid 6% to $561.2 million.

The company is trying to negotiate with lenders an extension of a forbearance agreement that expires Tuesday in order to ward off possible foreclosure proceedings.

Because of its dire financial straits, the company said in a regulatory filing Friday that "there is now substantial doubt as to our ability to continue as a going concern."

Nevertheless, the company continues developing its Netflix-like product, though that now is slated for early next year and not late this year, as the company indicated in March.

Movie Gallery also said it plans to expand its kiosk program, wherein 74 movie-vending machines -- and counting -- operate 24/7 in malls and supermarkets, and it still has VOD plans involving its Moviebeam acquisition.

Wall Street, though, doesn't appear confident. Shares of Movie Gallery plunged 18% to 36 cents on Friday, leading the decliners on The Hollywood Reporter's Showbiz 50 stock index. The company's stock traded above $28 in April 2005, when its $860 million acquisition of Hollywood Video closed, a deal that had Movie Gallery assuming $380 million in additional debt.

In the company's quarterly report filed Friday, Movie Gallery executives blamed its plight on several competitive factors, including low-cost DVDs that encourage consumers to buy instead of rent movies; the popularity of Netflix; and the proliferation of VOD and TiVo. They also cited a "weak movie title lineup."

"We incurred significant losses from operations as a result of current industry conditions and increased competition in the home video market," the company said in its regulatory filing.

The company also disclosed that it is getting much tougher to purchase items it needs to operate its business because of financial problems.

"Many of our significant vendors have discontinued extending us trade credit, and we have experienced additional tightening of terms with other vendors," it said.

Still, the company expressed confidence in its core business. "It is our belief that the brick-and-mortar stores will continue to retain their relevance," Movie Gallery said.